Despite gains for J.C. Penney, Best Buy and Sears, there are still plenty of skeptics

By Andria Cheng

Bloomberg

J.C. Penney Co. shares jumped 25% to $7.43 on Thursday, their biggest percentage gain in at least 30 years; Best Buy Co. was up as much as 9% before inching lower; Sears Holdings Corp. rose 6.7% to $43.09 after each of them reported their holiday quarter results, beating Wall Street’s lowered expectations.

The question then follows, is it time to buy these retailers, at one time or another considered struggling, with their very survival questioned by some?

While the bulls look to be winning on Thursday, there are plenty of skeptics for these companies seeking respectively a turnaround of their own.

David Tawil, a former bankruptcy attorney and an investment banker at Credit Suisse before co-founding the $65 million hedge fund, Maglan Capital, in 2011, said the sharply-lowered expectations for these retailers heading into their releases and some short covering for Penney and Sears contributed to investor enthusiasm on Thursday.

“I’m not buying any of them,” he told MarketWatch, adding he doesn’t have any position on any of the three after shorting Penney’s stock last year. Penney and Sears “are both extremely beleaguered. They both have mid-term liquidity issue and neither of them have found a recipe for success. Both of them are in need of a strategic turnaround and neither of them have expressed a vision.”

“The liquidity will support JCP’s continued work to turn around the business,” said Macquarie analyst Liz Dunn, who rates Penney neutral. “However, the heavy lifting to get back billions in lost sales and regain margins is still significant.”

Sears, meanwhile, narrowed its loss and again cited its continued increase in sales from its Shop Your Way reward members. The company, which is considering spinning off its Lands’ End business, said its “asset-rich enterprise” gives it “multiple levers” at its disposal. Same-store sales dropped 5.1% at Kmart and declined 7.8% drop at Sears department stores in the U.S.

“Sears reported its worst year since (CEO Eddie) Lampert combined Kmart and Sears nearly a decade ago,” said Credit Suisse analyst Gary Balter, adding on an EBITDA basis the company lost about $3.18 a share but had cash outflow of about $12.43 a share when combining pension payments, interest expense, tax payments, and capital spending. “What is the longer term game plan as Sears is a long way from being cash flow positive? The company’s continued denial on improving their store shopping experience, which remains where the vast majority of sales happen and to allow competitors with higher service levels to chip away at Sears’ market share, makes one wonder how Sears turns cash flow positive. Without that, we will continue to see the better assets being stripped away.”

Balter rates Sears underperform.

Sears
/quotes/zigman/95136/delayed/quotes/nls/shldSHLD “is burning the furniture just to keep the house warm,” Tawil said. “At the end of the day, the house is gonna be worthless. The emphasis on members club and online side isn’t enough to offset the losses occurring in stores.”

On Best Buy, Tawil said the company’s focus on consumer electronics, which are increasingly considered commodity products subject to more aggressive competition from online retailers, isn’t a winning strategy.

In the fourth-quarter, Best Buy’s “only saving grace is cost-cutting initiatives,” said Tawil, who in late January bought Best Buy’s smaller rival HHGregg Inc. after its stock was sold off because he likes HHGregg’s
/quotes/zigman/462162/delayed/quotes/nls/hggHGG increased focus on appliances and furniture, categories that he said aren’t as vulnerable to online competition. “The value proposition of bricks-and-mortar retailers is more specialized offerings. Unless you are Wal-Mart
/quotes/zigman/245476/delayed/quotes/nls/wmtWMT, you are not going to win in the mass offerings.”

Best Buy’s
/quotes/zigman/219712/delayed/quotes/nls/bbyBBY holiday sales declined as it blamed factors including weather, declining store traffic and intense promotions. Its gross margin also narrowed, hurt partly by price discounts and matching. The company, under CEO Hubert Joly, has cut $765 million in costs last year, higher than its previous target. It’s raised its cost-cutting projection. Best Buy reportedly told 2,000 managers on Wednesday they are being laid off. The company confirmed it’s “realigning its field organization” but said it’s not disclosing numbers. Best Buy has a total workforce of 145,000.

“If the company is laying off a bunch of sophisticated people and product specialists,” how do you get consumers interested in the specialty offerings? Tawil said.

Craig Johnson, president of Customer Growth Partners, said while he’s glad to see Best Buy making cost-cutting changes and “right sizing” its business, he agreed that the company needs to map out its broader strategy.

“They need to rethink the entire concept about consumer electronics superstore,” Johnson, whose firm advises institutional investors and retailers, told MarketWatch. “Will that store that was conceived in the 1980s be suitable in today’s times?”

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About Behind the Storefront

Behind the Storefront is a blog about all things retail. It’s aimed at investors, shoppers and anyone else with a passion for learning about what drives consumer behavior. Hosted by Andria Cheng, Behind the Storefront will cover the business, brands and shopping behavior that’s behind some of the biggest companies, and largest employers, in the world. You can reach Andria at Acheng@marketwatch.com.